Clarida Picked An Interesting Time To Rebalance Portfolio

Richard Clarida bought some stocks last year.

Specifically, he shifted between $1 million and $5 million into a PIMCO fund that invests in S&P 500 futures and short-term bonds just as the pandemic began to manifest in dramatic market outcomes. He moved the same amount into the MSCI Min Vol USA ETF. Both transactions took place on February 27, 2020 (table below).

On the same day, he pulled between $1 million and $5 million from a PIMCO bond fund. Clarida was PIMCO’s global strategic advisor and a managing director prior to becoming Fed vice chair.

A Fed spokesperson said the transactions “represent a pre-planned rebalancing to his accounts.”

That may well be, but the timing of the trades in notable, to say the least.

The very next day (so, within hours), Jerome Powell released a statement. “The fundamentals of the US economy remain strong,” Powell said, on February 28, at 2:30 PM in Washington. “However, the coronavirus poses evolving risks to economic activity,” he added, noting that the Fed was “closely monitoring developments and their implications for the economic outlook” and was prepared to “use our tools and act as appropriate.”

Just days later, the Fed delivered an emergency rate cut. Two weeks after that, they cut rates to zero and announced a $700 billion QE program. Fast forward eight more days and Powell unveiled open-ended QE and pledged to backstop the corporate bond market.

Clarida’s “rebalancing” is notable more for the optics than it is for any outperformance. He certainly didn’t escape the turmoil in equities that defined March of 2020. For whatever it’s worth, the min vol product woefully underperformed the S&P starting in late April of 2020. He bought more of it at the apparent expense of a Schwab large-cap fund at the beginning of August, leading to still more underperformance, at least if you take the simplistic view that he did this on purpose, in an effort to actively manage his own accounts.

The Fed went on to say that Clarida’s February 2020 transactions “were executed prior to his involvement in deliberations on Federal Reserve actions to respond to the emergence of the coronavirus and not during a blackout period.” On the day of the trades, he had a phone call with a Fed Board member and held multiple meetings with Fed staff in close proximity.

Irrespective of Clarida’s intent, the trades pile more pressure on Powell, whose reappointment was all but assured prior to the evolving mini-scandal which ensnared Robert Kaplan and Eric Rosengren in September. Both men announced their retirements last week. Rosengren cited health concerns. Kaplan conceded the scrutiny of his trading activities was a distraction, although he insisted he did nothing wrong.

It still seems very likely that Powell will be reappointed, but he does have critics. And at least one of them is powerful. This week, during a Senate hearing, Elizabeth Warren called Powell a “dangerous man.” The banking system, Warren said, is less safe because of Powell’s actions.

While Warren won’t likely succeed in overriding Janet Yellen when it comes to whose vote carries the most weight with Joe Biden, news that Fed officials actively traded financial assets at a time when the Fed was engaged in an unprecedented intervention in financial markets certainly doesn’t help make the case for a second term. As one former special advisor to the Fed told Bloomberg of Clarida’s trades, “the pandemic was spreading quickly and the economic outlook was evolving rapidly — that was not the appropriate time for top Fed officials to be making multi-million dollar changes to their portfolios.”

Clarida’s disclosures list a bevy of bank accounts, trusts, money market funds and brokerage accounts. The vice chair has at least seven bank accounts, two of which contain between a half million and a million dollars. Note that even in an environment where cash earns nothing, Clarida’s cash hoard still paid him as much as $9,000 in interest last year, nearly twice what the average American earns from a month of work.